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Where Did All Our Provider Systems Come From?

Part I: Large provider systems dominate American healthcare.

Key points

  • Provider systems dominate healthcare markets.
  • Five decades of government policy have fueled the rise of healthcare systems.
  • Healthcare systems are the unintended consequence of policies intended to improve access to care.

We use the term “Big Med” to capture the gamut of mega-providers – large horizontally and vertically integrated provider systems – that dominate healthcare markets, from Partners in Eastern Massachusetts to Sutter in Northern California, and seemingly everywhere in-between. Our recent book chronicles their rise and pernicious effects on society, particularly rising healthcare costs. Since we all pay for these rising costs, we should all be outraged. As Saul Goodman would say, “Who can I sue?”

There is plenty of blame to go around. In this blog, we consider the oft-overlooked role played by three attempts by the federal government to expand health insurance coverage, two of which made it into law. As is so often the case with federal policy, “Big Med” was not a goal so much as it was an unanticipated consequence of a series of policies, each encouraging even “Bigger Med.” In future posts, we consider the roles of hospital executives, physicians, regulators, academics, and potential market disruptors.

Back in the days when Marcus Welby, M.D., was the nation’s top-rated television program, nearly all hospitals were independent; few were for-profit. Likewise, there were only a handful of large medical groups like the Mayo Clinic and Cleveland Clinic; most practices were “onesies and twosies.” Healthcare was basically a cottage industry of “mom-and-pop operations.”

The 1965 passage of Medicare changed everything. The expansion of insurance coverage combined with generous reimbursement policies, including guaranteed returns on capital investments, may have been necessary to buy off the professional associations that had traditionally opposed a government “takeover” of healthcare. But the megabucks behind Medicare served as a siren call to investors, prompting a wave of hospital consolidation. Business entrepreneurs (many from outside healthcare, including Jack Massey from Kentucky Fried Chicken) developed “chains” of proprietary hospital systems, primarily through acquisitions of existing, freestanding proprietary hospitals, many of which were in rural areas and owned by physicians. Between 1965 and 1970, the number of for-profit chains grew from 0 to 29, owning 207 hospitals. These numbers quickly expanded to 300 hospitals in 1975 and then 399 hospitals in 1978.

The National Health Resources Planning and Development Act of 1974 added further fuel to the acquisition fire. In listing ten national priorities to be used in health planning efforts, Congress referred explicitly to “inter-organizational arrangements” several times, urging “the development of multi-institutional systems for coordination or consolidation of institutional health services” (P.L. 93-641, 1975). By 1982, for-profit chains operated 1,045 hospitals.

There were limits to the growth of for-profit systems, however. Most hospitals in urban areas remained nonprofit and, by the 1980s, they had grown quite adept at exploiting the same payment rules that fueled the rise of for-profits. None of the for-profit chains survived in its original form, though a new Hospital Corporation of America has emerged, while Humana reinvented itself as a health insurer.

As the 1980s came to a close, urban healthcare markets remained fragmented. A new effort to expand insurance coverage would soon change all that. President Clinton’s ill-fated 1993 Health Security Act was ostensibly an effort to expand coverage, but it also called for a massive restructuring of both the payment and delivery of healthcare. The Act came at a time when the idea of “managed competition” was taking hold in academia and inside think tanks like the Jackson Hole Group, many of whose members advised Hillary Clinton’s task force that designed the plan. They proposed to manage competition by empowering states to purchase healthcare from organized delivery systems – a new concept that, despite proof of concept, had quickly gained acceptance in key academic circles. Uncertain about what it would mean for the future of healthcare delivery, the Clinton plan scared the Bejeezus out of providers, who sought refuge by teaming up to form both horizontal and vertical systems. Although Congress failed to pass the Health Security Act – unlike Medicare, there wasn’t much in the plan to win the support of organized medicine – providers quickly came to enjoy their safety in numbers, and the nuclei of most of today’s megaproviders had formed.

This pattern would be repeated one more time with President Obama’s Affordable Care Act. The Act both expanded health insurance coverage and sought to reorganize care delivery, this time through the promotion of Accountable Care Organizations. Provider worries about what the ACA would portend led to yet another wave of hospital mergers and acquisition of physician practices. Today, most hospitals are in large systems, and a growing number of physicians either directly or indirectly work for hospitals. The age of the megaprovider is upon us.

In one sense, five decades of government efforts to expand access within a mostly competitive, market-based healthcare system have worked. The percentage of Americans with health insurance is at an all-time high. In another sense, these efforts have failed. We still have healthcare markets. But many, if not most, are dominated by megaproviders. Markets, yes. Competitive markets, maybe not. Big Government, meet Big Med.

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